Green Budgeting – useful perspective for SAIs

02.10.2023


Dealing with climate change - and with the other pressing issues of sustainability requires a budgetary response. The OECD has been working with Member Countries to identify and share best practice - notably through the Paris Collaborative on Green Budgeting. For the INTOSAI Working Group on Environmental Auditing, Green Budgeting is a useful perspective in the Work Plan 2023-2025 project on Green Fiscal Policy Tools.

Green budgeting is a budgetary planning strategy which evaluates the impact of environmental costs and benefits when making budget decisions. It requires assessing the long-term economic risks associated with environmental and climate issues. This strategy guides budgeting decisions towards more sustainable investments and policies, focusing on creating mutual benefits for both the economy and the environment. For instance, green budgeting strategies may include spending on green infrastructure, energy efficiency measures, incentivising sustainable production and consumption, cleaner transport, and investing in R&D for renewable energy. In 2022, two-thirds of OECD countries had implemented green budgeting mechanisms (24 out of 36), compared to 14 out of 35 countries in 2021 (+40%). The most prevalent budgetary tools refer to carbon pricing mechanisms (22 countries, + 83% compared to 2021), environmental impact assessments (18 countries, + 33% compared to 2021), and green tagging (13 countries, +41% compared to 2021)[1].

Supreme audit institutions (SAIs) are responsible for conducting independent, objective audit and reporting activities on how public funds are being used. In an effort to promote better public financial management and improve the accountability of governments, the role of SAIs in green budgeting processes and implementation has been growing significantly but still needs to be strengthened.

Several SAIs carry out environmental and climate audits on thematic topics, but few of them on green budget expenditure. In France, the SAI published a report on the government's green budget in 2023. It explains that France is rating its budget expenditure granularly, but that this tool can be improved and has limits. In Italy within the Green Bond Framework, independent auditors verify green spending targets financed by green bonds. In 2022, the European Court of auditors also published a report proposing recommendations on the European Union green budget statement and is currently auditing the green tagging in the EU recovery instrument (NGEU) to assess its alignment with and contribution to the European Green Deal objectives on climate action.

SAIs play a key role in the implementation of green budgeting processes in three main areas.

  • They help to ensure that public resources are allocated effectively and efficiently for green activities.
  • They provide assurance that budget processes supporting green activities comply with the principles and practices of good governance, including transparency and accountability.
  • They can assist in evaluating the impact of green projects and programs and help to ensure that policies and objectives are achieved.

The involvement of SAIs in the green budgeting process is becoming increasingly important as governments attempt to shift spending to support more sustainable economies. SAIs can help ensure public funds are being used to promote sustainability, accountability and effectiveness in green activities by providing effective oversight and assurance. However, SAIs face a number of challenges in strengthening their review of green budgeting initiatives:

  • Lack of resources needed to audit all of the processes involved in a green budgeting approach. This can limit the scope of their audit.
  • Lack of clear objectives: Many governments do not have clear goals for green budgeting. This makes it difficult for SAIs to properly evaluate the effectiveness of implementation.
  • Political interference can challenge SAIs’ ability to conduct truly independent audits.
  • Lack of information: SAIs may not have complete information about the impacts of green budgeting processes. Without this information, it may be difficult to evaluate whether processes are achieving their desired outcomes.
  • Poor coordination between stakeholders: Effective green budgeting requires collaboration between multiple stakeholders, including SAIs. When these stakeholders are not adequately coordinated, it can be difficult to ensure the effectiveness of green budgeting.

SAIs can reduce the challenges they face when auditing green budgeting processes and implementation by taking a series of proactive measures.

  • Adopt a principles-based approach (such as INTOSAI guidelines) in order to ensure that environmental auditing standards are regularly updated and maintained to align with the latest environmental regulations and best practices.
  • Use data analysis and trend reporting to better understand tendencies in green budgeting and to assess the effectiveness of green initiatives.
  • Invest in green accounting, which involves the collection, analysis and reporting of environmental data to assess the sustainability performance of the government. This would enable the institution to better understand the environmental impacts of government activities and decisions and to provide assurance to the public on the government’s green budgeting processes.
  • Demand transparency and compliance in all departments to ensure consistency and adherence to laws and directives in using taxpayer funds for green initiatives. This would help to ensure that the government’s green budgeting efforts are directed to the right projects and that the efficacy of green initiatives is in line with expectations.
  • Introduce mandatory audits to assess the effectiveness of governments green budgeting practices. These audits would provide an independent review of green initiatives and help to detect deficiencies in policies and processes.
  • Ensure cooperation and collaboration with ministries and other SAIs to ensure that information is shared, and best practices are adopted.
  • Develop bespoke rating schemes to assess the extent to which government departments and organisations are meeting green goals. These ratings would provide the public with objective and neutral analysis to improve the democratic process.

 

By Margaux Lelong, Policy Analyst at the OECD

Margaux-Lucrèce Lelong, is a French Senior Civil Servant and Policy Analyst at the OECD, specialising in PFM and Green Budgeting. Before joining the OECD, Margaux was a financial magistrate and external auditor for the UNESCO and the WFP within the French Supreme Audit Institution. She then joined the French Ministry of Finance where she was working on PFM issues and the Green Budget. She also worked for the IMF and WB as a PFM expert. She holds two master’s degrees from Sciences-Po and the University Sorbonne (France) where she has been teaching Public Finance and Budgeting since 2015.

[1] OECD, Government at a glance 2023